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Fund flows: See where the money is going.

Stock funds stabilize, bond funds keep rolling, and emerging markets funds stay mixed.

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Understanding market momentum is critical for investors and traders. Fund flows, the ebbs and flows of the $1.7 trillion market for U.S. listed exchange-traded products (ETPs),1 can offer valuable insight into which parts of the market may have the wind at their back—or in their face.

The latest information from BlackRock® iShares® Capital Markets shows there may be some changes afoot.1

U.S. stock funds stop the bleeding

Over the past several years, stock fund flows have been strong, while bond flows have languished. This should come as no surprise, as investors gravitated toward the generally higher returns that stocks have offered.

That trend did not continue in the early part of 2014, suggesting the momentum for this category was slowing. In the 30 days prior to May 9, $9.6 billion had left U.S. stock funds.

Fund flows can be a meaningful indicator

This fund flow data reflects ETP flows and not mutual funds, and is representative of what all investors are doing—including institutions, advisors, and individuals.

Yet during the week ending May 16, 2014, U.S. stock funds increased for the first time in five weeks. Within this category, the gains were mostly spread out across sector, large cap, and small/micro cap funds. 

Sector funds still a draw

Five of the last six weeks have seen inflows into sector funds as investors continue to use sectors to adjust their asset allocation. Of the $3.9 billion inflows to U.S. stock funds during the May 16 week, $1.2 billion went into sector funds, with heavy buying of energy funds ($684 million) and utility funds ($348 million).

Meanwhile, sizable outflows continued for financials (-$408 million) and health care (-$243 million), two sectors that have seen significant outflows during May thus far.

Net inflows for bonds

Stock funds aren’t the only place where there have been shifting winds.

Bond funds unpacked

Increasing interest in longer-duration funds has been one of the more noteworthy trends in the fixed income space during 2014. iShares Barclays 20+ Year Treasury Bond ETF (TLT), for instance, has seen assets under management increase by 55%, thanks in large part to a 10% gain year to date.

Fixed income, which had experienced strong outflows over the past several years, continues to be a positive surprise in 2014. Fixed income fund flows gained for the fourth straight week, driven by healthy demand for longer duration investment grade exposure (see sidebar).

Diving deeper into the fixed income ETP world, floating-rate debt funds—which are funds based on floating interest rates—saw their first outflow in 95 weeks in mid-April (see chart below),2 after surging over the past several years as investors have anticipated rising interest rates. That fear seems to have abated somewhat as U.S. Treasury yields have been relatively range bound since September 2013.

Winners and losers by country

Much of the geopolitical headlines have been dominated by Russia over the past month. Despite a credit rating downgrade from S&P in April amid another round of sanctions, outflows from the oil-rich Eurasian nation during 2014 have been relatively contained.

However, fellow BRIC nations, China and Brazil, have been the largest sources of emerging-market weakness over the past several months, in terms of fund flows. Meanwhile, India stock funds gained again, adding nearly $200 million in flows last week, riding the victory wave of India’s next prime minister, Narendra Modi. Spain, Mexico, and Italy are also seeing relatively strong inflows, displaying surprising resilience considering some of the structural issues these countries face.

Where might the flows go next?

Some forecasts are calling for stocks to move sideways in the coming weeks and months. If that is indeed the case, there may continue to be some bifurcation within the stock and sector funds universe. Can bond funds continue their run of momentum? Despite the consensus, bonds certainly shined in the first quarter of 2014 and bond fund flows have reflected that strong performance.

Learn more

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Before investing in any mutual fund or exchange-traded fund, you should consider its investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus, offering circular, or, if available, a summary prospectus containing this information. Read it carefully.
1. Source: BlackRock iShares Capital Markets Follow the Flow report.
2. FFAS Capital Markets Group.
For iShares® ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive, long-term marketing program that includes promotion of iShares ETFs and inclusion of iShares funds in certain FBS platforms and investment programs. Additional information about the sources, amounts, and terms of compensation is described in the ETF’s prospectus and related documents. Fidelity may add or waive commissions on ETFs without prior notice. BlackRock and iShares are registered trademarks of BlackRock, Inc., and its affiliates.
Effective September 30, 2013, any eligible iShares ETFs purchased commission free must be held for a minimum of 30 calendar days or a short-term trading fee will apply.
Exchange-traded products (ETPs) are subject to market volatility and the risks of their underlying securities, which may include the risks associated with investing in smaller companies, foreign securities, commodities, and fixed income investments. Foreign securities are subject to interest-rate, currency-exchange-rate, economic, and political risk, all of which are magnified in emerging markets. ETPs that target a small universe of securities, such as a specific region or market sector, are generally subject to greater market volatility as well as to the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or complex investment strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees, expenses, and tracking errors. An ETP may trade at a premium or discount to its net asset value (NAV) (or indicative value in the case of exchange-traded notes). Each ETP has a unique risk profile that is detailed in its prospectus, offering circular, or similar material, which should be considered carefully when making investment decisions.

Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for funds that focus on a single country or region.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.)  Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Past performance is no guarantee of future results.

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